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Apple E-Books Trial May Affect Content Pricing Agreements

Apple's e-book pricing and dealings with publishers are on trial (Image via CrunchBase)

by Joshua Sisco and Cecile Kohrs Lindell

This article is provided by PaRR (Policy and Regulatory Report), a newly launched product of The Mergermarket Group providing proprietary intelligence and research on competition law and sector-specific regulatory changes around the world.

If the federal government wins its civil trial against AppleApple, there is likely to be a dramatic shift in agreements made for digital content distribution, according to industry participants who are closely following the matter.

The Department of Justice (DoJ) is alleging that Apple used price-matching agreements, or most favored nations (MFN) clauses, to force book publishers into leveraging Apple’s rival, Amazon, into signing new contracts that allowed for higher consumer prices for new bestsellers.

MFN provisions are contracts that guarantee a customer that it will receive prices that are at least as favorable as those provided to other customers of the same seller.

The government is saying the MFNs were a tool to limit the competition from Amazon, but in today’s rapidly developing digital marketplace, MFNs are merely a means to protect new entrants, argued Harvey Geller, a partner with Steptoe & Johnson in Los Angeles, California and a former general counsel at Universal Music Group.

The media business would be drastically different without the agreements, said Peter Csathy, CEO of Manatt Digital Media Ventures, a consulting and venture capital group at the law firm Manatt, Phelps & Phillips. Csathy previously led several digital media startups including Musicmatch, one of the first digital music stores.

“MFNs are used all the time in the media business and have been since the beginnings of time,” Csathy said. If the government’s challenge in the Apple case is successful, he said he is concerned MFNs will be more broadly challenged in other areas, which could ultimately give dominant companies such as Apple and Amazon a significant advantage.

Though MFNs are an important issue, the trial is also being watched to see how companies try to shift suppliers or resellers into different business models. The DoJ is arguing that by Apple making book publishers sign an agency contract with MFN clauses, it forced the publishers to also move to an agency contract with Amazon.

The agency models allow a content owner to set the price that a retailer is able to charge. The retailer takes an established percentage of each sale. By contrast, under a wholesale agreement, the retailer buys the content from the owner and is then able to set the price themselves.

The DoJ is arguing that through agency – also known as affiliate – pricing agreements, the company helped set up a scenario in which book publishers were able to set higher prices for e-books in the Apple bookstore than what consumers had previously paid for e-books through competing services such as Amazon and Barnes & NobleNoble.

For its part, Apple is saying that as a late entrant to the e-book market, it needed to offer agreements that the publishers would find more favorable, and the publishers were clamoring for an agency pricing model.

Apple’s content agreements with book publishers contrast sharply from those it started inking ten years ago with record labels, due in large part to its immediately dominant position in the music business. Apple never wanted the agency model with music, Geller noted, because it had the dominant position in digital music sales.

Apple did not respond for comment.

The federal government believes that content prices would decrease for consumers if there were no agency pricing models between the content owners and retailers.

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